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The Board towards the future
by Professor Pedro Nueno
A board can –and should– contribute greatly to a company. A board should do more than supervise a firm, ensure that it is following the strategy, or meeting the budget; it should go beyond asking the management questions about any difference between proposals and reality. Boards can contribute to making important changes in the evolution of the company.
Before the onset of Covid-19, I wrote a book that was published in October 2020 under the title Managing with Speed. By 2019, prior to the challenges brought by the pandemic, it had become obvious to me that companies were moving faster. There was more innovation and internationalization, as well as an increasing number of acquisitions (as a way of growing faster or internationalizing). These developments were facilitated by a healthy financial system, which included banks, private equity and venture capital.
Although we’re still experiencing the difficulties (and the costs) of Covid-19, many companies have recovered from the problems of 2020 and resumed their regular activities. The crisis has wiped out many companies, with some sectors –such as tourism– more affected. Some companies were simply too small, and larger firms in their sectors could provide better services. In addition, due to the slowdown in the financial system, it became more difficult for small companies to get loans. The number of suppliers in many sectors decreased, leaving greater market share to those that remained. As the economy was recovering, the companies that survived moved faster.
Boards should not be bureaucratic in these situations. Yet some boards start lengthy discussions when they receive proposals from the management. For example, when considering the acquisition of a small company to add sales or an interesting product that can be sold to clients of the acquiring company, some board members will focus on the potential problems. Are we sure that the possible acquisition does not have legal problems? Have we studied this? Are the numbers they have given us (balance, income statement, cash flow forecast) correct? Are they audited by a reliable auditor? What will happen with their management? Will we retain them or should we ask the selling shareholders to compensate the management so they will leave? Sometimes the board launches so many questions about the potential acquisition that, while it’s debating, someone else acquires the target company. Boards are crucial in cases of acquisitions, financial restructuring and industrial restructuring. But, in the current environment, these issues must be dealt with quickly.
Internationalization is another responsibility of boards. Sometimes, management becomes accustomed to the geographic deployment of the company. If one day a board member says, “I have read in the press that company X (a strong competitor) has entered China through the acquisition of a Chinese company. Should we enter the Chinese market, too?” The answer of the board will be “yes, of course.” Questions about how to do this will then arise. Should we start from zero by opening a branch there, selling through exports at first, with the idea of eventually manufacturing some of our products there? Should we do this while importing others, while exporting some from our China plant? How, when and who? Do we hire a consulting company? Or do we assign the responsibility to one of our managers who has international experience and would not mind spending a lot of time in China and perhaps living there? Are we willing to buy a percentage of a Chinese company and become a partner in a joint venture? Again, in many sectors today, if you don’t enter new markets quickly, you may find that a lot of international companies are already there competing, along with tough Chinese companies.
Only entrepreneurial boards, rather than bureaucratic ones, can speed up companies. They can do this by accelerating their access to the best technologies, international deployment, continuous creation of value and market leadership. Companies also need boards that have had experience with technological innovation and internationalization. All board members should have a solid knowledge of financial and general management. Having members who have served on the boards of important companies or business associations, or who have held relevant government positions, may bring prestige. But this prestige won’t provide the competitive leadership needed for the company to grow at a reasonable speed. Instead, boards need expertise and knowledge, so they can also attract the best members – whether they be men or women, young or old (in good shape, of course).
Pedro Nueno
Professor of Entrepreneurship
IESE Center for Corporate Governance
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